Day, everyone, and welcome to the Integra's 4th Quarter 2017 Earnings Call. Today's call is being recorded. At this time, for opening remarks and introductions, I'd like to turn call over to Steve Kanter, Vice President of Corporate Relations. Please go ahead, sir.
Thank you. Good morning, everyone, and thanks for joining our call. Earlier today, we announced the financial results for our fourth quarter fiscal year ended December 31, You can access a copy of our press release on our website, www.integris.com, Before we begin I would like to remind listeners that our comments today will include some forward looking statements These statements involve a number of risks and uncertainties, which are outlined in detail in our reports and filings with the On this call, we will also refer to non GAAP financial measures as defined by the SEC in Regulation G, you can find a reconciliation table in today's press release and on our website. Please note that we will be holding an Analyst Meeting on March 20, at our headquarters facility in Massachusetts. And you can contact me for more information and to register.
And with that, On the call today are Bertrand Loa, President and CEO and Greg Graves, CFO. Bertrand will now begin the call. Bertrand?
Thank you, Steve. We'll make some comments on our 2017 performance and provide an outlook for 2018. Greg will follow with more details on our financial results and provide guidance for the first quarter. Our record 4th quarter capped the most successful year in Integrys's 51 year history. We grew fiscal 2017 sales 14% to $1,300,000,000, achieving growth across our 3 divisions.
We expanded our served markets with new value added solutions and new customer engagements. We exceeded our financial commitment for 2017 to grow our bottom line at twice the rate of our top line. Indeed, our adjusted EBITDA and non GAAP EPS grew by 35% 53%, respectively. We refinanced our senior notes at a favorable rate as part of our value creating capital allocation framework that balances internal investments acquisitions, debt repayment that the semiconductor industry is in the midst of a multiyear growth cycle. When I expressed this view publicly 3 years ago, I recall that my optimism was met by some with a degree of skepticism.
As we entered 2018, There is compelling evidence that cheap demand is accelerating and more exciting times lie ahead. Supported by a stable, growing global economy, We are now seeing new applications for semiconductors that expand well beyond PCs, smartphones, and mobile computing. Demand for higher performing logic devices and high end graphics chips is being driven by artificial intelligence, cloud Computing, and many new emerging applications. Sweden And Technology is transforming data centers, as well as enabling new edge computing devices in a growing number of applications in automotive, IoT, industrial, and robotics. While we certainly benefited from the tailwind of robust semiconductor production in 2017, It is Integrys's portfolio of value, materials related solutions that is driving our market expansion and our market outperformance.
Entegris' value proposition is to enable the integration of new materials at the required level of purity in our customers' processes. 1 of our key strengths is the breadth of our technology portfolio and the diversity of our customer set, which allows us to participate in a multitude of technology and market infections across the industry. Our ability to grow 14% and outperform our markets in 2017 was due in part to 2 to 3 of these infections. The emergence of 3 continued node shrink and growth of the Chinese semiconductor market. I will talk briefly about each of these.
Up until recently, Advanced Foundry And Logic have been the primary drivers for Integrity Solutions, but this has changed. With the emergence of 3 d NAND, memory related solutions accounted for approximately 35% of our sales to fab customers in 2017 compared to 27% last year. The growing complexity of 3 d NAND structures and related process challenges have opened up new opportunities for solutions across our portfolio and across all three divisions. Our fluid handling solutions and advanced loops benefited from significant investment in new advanced memory fabs. As these new fabs ramped up production, We started to enjoy additional revenue opportunities for our deposition materials, formulated claims and filtration solutions, which are used in their daily production cycles.
In particular, our new Advanced Deposition Materials, which offer better electrical and structural properties continue to be embraced by our memory customers as they integrate new process innovations to increase the number of layers from $32,000,000 to $64,000,000 and beyond. 2nd, the purity requirements at the advanced notes continue to increase. Advanced logic and advanced memory feature very complex structures with ever smaller geometries and high aspect ratios which are highly susceptible to contaminants. Our filtration and purification solutions are becoming increasingly critical for the most advanced fabs if they want to achieve optimal yields. More and more, these requirements are being pushed up into the supply chain.
As both chemical manufacturers are expected to increase purity levels in their own manufacturing processes. These combined trends drove our filtration sales up 20% in 2017, as we introduced a number of new products including new purification solutions and advanced filters that offer greater selectivity and retention. 3rd, we grew our sales in China by 26% as we continue to benefit from the construction and ramp of a number of new fabs for both Leading Edge and mainstream applications. To support our China strategy and drive future growth, we entered into 2 relationships with local partners, Spectrum and Jingxing to increase our capacity and reduce lead times for certain specialty gases and deposition materials. Chinese customer qualifications for these products are underway, and we expect these partnerships We grew our revenue increased fab activity in both logic and memory and broader acceptance of our solutions across the peninsula.
In Europe, we grew 14%, driven by strong production of IoT and automotive devices. And we were also pleased with our growth in Japan and in the U S, which grew 9% 13%, respectively, as the result of high levels of OEM activity, and increased demand from both chemical customers. We achieved another year of strong operating performance and cash flow, We generated record level EBITDA of $357,000,000 or nearly 27% of sales. Compared to 22% in 2016. Or we increased sorry, we increased our free cash flow 40 percent from last year to $200,000,000 or 15% of sales compared to 12% in 2016.
This cash flow is enabling us to continue to deliver on our capital allocation strategy, balancing internal investments, acquisitions, debt repayment, and returning cash to shareholders. I will touch on each of these elements briefly. In 2017, our internal investments included $107,000,000 in R&D and $94,000,000 in CapEx. Our CapEx investments added manufacturing capacity and capabilities in support of a number of new growth initiatives We also upgraded our technical centers in Taiwan and the US, adding scientific talent and advanced metrology capabilities. We believe these investments will allow us to respond faster to our customers and further differentiate us from our competitors.
In terms of acquisitions, we completed 2 small transactions in the past 12 months. The first in April 2017 was the acquisition of a filtration product line we now call TRENSIQ. And recently, we announced a purchase of particle sizing systems or PSS for $37,000,000 in cash. PSS Technology enables customers to prevent costly yield excursions by automating real time analysis of particle sizes in critical fluid processes. CSS inline monitoring solutions expand our value proposition in CMP.
Both Trincic and PSS exemplify what you can expect from Entegris in terms of acquisitions. These are 2 established, successful, growing and profitable businesses that will benefit from gaining access to our quality systems supply chain teams and our global integrase distribution channels. During the year, We also repaid $100,000,000 of our term loan, continuing our cadence of repaying $25,000,000 per quarter. Finally, we returned 38,000,000 to shareholders, 28,000,000 through an ongoing quarterly share repurchase program, and $10,000,000 through the initiation of a quarterly dividend of $0.07 per share. As I look ahead, we were both technology transitions and demand trends accelerating We expect to continue to outperform our markets in 2018.
Is to grow our top line over the next 5 years. And gratitude to the integral teams around the world for their dedication and the quality of their work. Integacy's success is the direct result of their collective efforts as they go the extra mile every day to support our customers, and as we continue to strive to reach new levels of excellence, I will now turn the call to Greg for the financial detail.
Thank you, Bertrand. We had many reasons to be pleased with our fourth quarter and full year performance, which reflected record levels of sales, earnings and cash flow. Q4 sales of $351,000,000 grew 14% from a year ago. And 1% from Q3. Our Q4 GAAP loss per share of $0.20 reflected the $70,000,000 plus impact tax reform and $20,000,000 of costs related to the refinancing of our senior notes.
On a non GAAP basis, we achieved earnings per share Our Q4 operating performance reflected 2% in third quarter as our manufacturing teams again executed very well and we continued to benefit from higher volumes. We expect our gross Non GAAP operating expenses in Q4 were 80 We expect non GAAP operating expenses Non GAAP operating margin was 54% for the full year 2017, reflecting a one time charge of $67,000,000 comprised of a $73,000,000 charge related to the tax on accumulated foreign profits and $4,000,000 for potential future withholding taxes offset in part by a $10,000,000 benefit related to the revaluation of our net deferred U. S. Tax liabilities. Excluding these impacts, our non GAAP 18, we are expecting our non GAAP rate to be reduced to approximately 21%, reflecting the favorable impact of tax reform and the anticipated geographic distribution of income, the majority of which is derived from outside the US.
While the new tax law did not significantly lower our global tax rate, it does give us the ability to repatriate a significant amount of cash. In 2018. Adjusted EBITDA for the quarter was a record $97,000,000 or 28 percent of revenue. For 2017, we have generated $357,000,000 in adjusted EBITDA which is nearly 27 The full year growth in EBITDA relative to revenue demonstrates the operating leverage in our model and is consistent with our 20 17 objective of growing EBITDA and more than twice the rate of sales. Turning to our performance by division, Fiscal 2017 sales for Specialty Chemicals And Engineered Materials or SCEM grew 13% from a year ago.
SCEM segment non GAAP adjusted operating margin was 27.4% up from 22.6% in Q4, up from 22.6% in Q3. In Q4, SCEM sales of $125,000,000 grew 13% from Q4 of last year, and were up slightly from Q3. The quarterly growth was driven by continued strong demand for our advanced deposition materials for 3 d NAND and advanced node applications. Fiscal 2017 sales for microcontamination control or MC grew 20%. MC achieved an adjusted operating margin of 37.2 percent, up from 30.5% in 2016.
In Q4, MC sales of 100 and $16,000,000 were up 17% from Q4 of last year and were essentially even with Q3. The strong sales reflected strength in liquid filters and new purifier solutions for wet etch and clean and bulk photo applications, as well as strength in gas filter products driven by strong industry tool shipments. The performance of the Transit product line we acquired from Gore in April is ahead of plan and we are finalizing the qualification of the manufacturing equipment. That has been moved into our Billerica facility. Fiscal 2017 sales for Advanced Materials Handling or AMH of $421,000,000 grew 10 percent from a year ago.
AMH's non GAAP adjusted operating margin of 20.3% was down from 20.9%, primarily as a result of less favorable mix. During the year, we implemented In Q4, AMH sales of $110,000,000 were up 11% from Q4 of last year, and grew 4% from as well as
and CMP tools.
Cash flow from operations for the quarter was 86,000,000 and free cash flow was $60,000,000 or 17 percent of revenue. DSOs were 48 days, a modest improvement from the 3rd quarter and inventory turns of 3.8 declined from 3.9 in Q3. Turning to the balance sheet. During the quarter, we took advantage of the favorable debt market to complete a successful 550,000,000 dollars notes offering to refinance percent to 4.58s, but allowed us to raise $170,000,000 of incremental capital on favorable terms to use for potential accretive acquisitions. In addition, the new debt has an investment grade style covenant package that significantly increases our financial flexibility.
During the quarter, At year end, total long term debt was $674,000,000 and our net leverage was 0.1 times. Us of cash during the quarter included CapEx of $27,000,000, consistent with our expectations. For the $100,000,000 to $110,000,000 in 20.18 related to ongoing investments to support our new product introductions and growth in advanced deposition, filtration, specialty materials, and specialty gas solutions. As of December 31, our cash balance was $625,000,000, of which approximately $270,000,000 was in the US. As mentioned earlier, we are reviewing our options to repatriate a meaningful amount Turning to our outlook for Q1, we expect sales to range from $355,000,000 At these revenue levels, we expect non At our upcoming Analyst Meeting in March, we intend to provide more color on our growth plan and to refresh our target operating model.
In summary, we are pleased with our operating and financial performance and specifically the earnings flow through we are achieving relative to our top line growth. Our business continues to generate significant cash flow and the portion available to deploy pursuant to our capital allocation strategy will increase with Finally, with positive industry momentum and a product portfolio that has leveraged to key industry trends since such as 3 d NAND and the Internet of Things, we are excited about our prospects for 2018. Operator, we'll now take questions.
We'll go first to Toshiya Hari with Goldman Sachs.
Great. Thanks very much for taking the question and congrats on the strong results. Bertrand, I was hoping you could provide a little bit more color on your Q1 guide some of the comments you made on 2018 as a whole. I guess, what are your expectations for the individual segments from a revenue growth perspective both for Q1 and twenty eighteen. And if you can touch on any contribution from PSS, that would be great.
Thank you, Toshi. So you probably have three questions. Let me start with the Q1 guidance. Then I will expand a little bit on some of the assumptions behind the full year 2018 guidance and then I'll take your final questions about about PSS. So around the Q1 guidance, we expect to encounter a fairly mixed industry environment, but overall, we expect our business to continue to perform.
Better than the industry and better than normal seasonal trends. So if I want to give a little bit more color to that, I would say that we expect, steady levels of activity in 3d NAND, and the in the older logic fabs. And that most likely will be offset by sequentially lower utilization in advanced logic. And, we expect similar type of lower utilization levels at a number of our foundry customers as well. So the net effect of that will be most likely in MSI modestly down sequentially in Q1.
On the CapEx front, we expect the industry to be relatively strong in the first half of the year. And in Q1 specifically, we would expect, CapEx to be up 5% to 10% sequentially, roughly. So At the midpoint, our guidance represents about a 3% sequential increase versus Q4. Which is essentially up 200 basis points over the industry. So very consistent with our long term growth.
So that's for Q1. So your next question was around the full year 2018 guidance. And in 2018, again, we continue to be very optimistic. We expect 2018 to be another very good year for the industry. And a great year for Entegris.
Threefour of our revenues, as you know, is driven by the level of activity in the fabs. And we expect MSI to grow at about 6%, in 2018. And again, like in 2017, we expect DRAM, 3 d NAND and IoT to drive IC demand in 2018. If you look at the underlying trends for industry CapEx, we would expect the industry CapEx sort of full year to grow at about 6%, roughly. And but we expect most of that positive impact to to impact the first half of the year.
So in other words, mostly front end loaded for our business at least. So if you blend all of that, what we are, proposing as a guidance for 2018 is essentially outperforming the industry by about 200 to 300 basis points. And that's really going to come from continuing to capitalize on the new product momentum, that a number of new products that we launched in 2017 And also, we expect to fully leverage the new capacity that we invested in during 2017. So that's that would be my commentary around 2018. And that's you're right.
We one of the big news obviously over the last few weeks is the acquisition of PSS We are very proud of being able to add that technology to our portfolio. I think this is a very unique technology that provides more accurate measurement, in terms of size and concentration levels of particles in process fluids, One of the major applications that we're most excited about is really the ability to, identify agglomeration of slurries that compromise yields in the CMP process. And I think it's we are very excited in the technology itself. I think it's a very exciting technology in its own right, but we are, of course, very encouraged by the potential pull through opportunity for our filtration products. So overall, great technology, a business that we expect to grow very nicely in 2018 and that we expect to be accretive in 2018 as well.
Great.
Bertrand, could you perhaps quantify the impact from PSS?
The revenue for PSS on a full year basis is about $10,000,000 to $15,000,000.
Okay, great. Thank you so much. And then as a follow-up, for Greg, on the gross margin front, obviously, you guys continues to do very well here, delivering upside in Q4 and guiding well into Q1. I guess longer term on a 2 to 3 year basis, what is the potential upside from a gross margin standpoint? And if you can give us an update on some of the restructuring initiatives in AMA and how big the contribution there was for Q4 and perhaps Q1, that would be great.
Thanks so much.
Yep. So with regard to gross margin, we guided to 46% to 47%. We were at 46.7 in the quarter. I would say, I said the quarter was really impacted by strong performance on the manufacturing side, higher volumes. Mix was actually, slightly negative.
So even at 46.7, I mean, our mix was not quite as good as in Q3. As we move out, if you think 2 or 3 years down the road, I mean, I'm not going to stretch it too far, but I would think we could get into that. A 48% range. I just have always said, I don't see this as a business where we're going to get up into the 50% range. I just don't think the customer is going to let us go there.
And that was sort of the first part of your question. Second part of your question, could you repeat that? AMH and Oh, AMH, yes. So in the current quarter, the impact was really we made headcount reductions. So we saw the benefit of that.
Much Other areas where we're going to benefit in AMH is we're exiting a facility, which doesn't happen until the end of the second quarter. So we didn't see the benefit of that. And we're also execute, exiting a smaller business that we're in the process of I would just say exiting that business and that probably doesn't happen until the end of Q2 either.
Okay. Very clear. Thank you so much.
So I would say between now and Q3, we're not going to see much incremental impact from the restructure in that business by the time, but as we get out of the facility at the end of Q2 and get out of that, the smaller business we're exiting that happens in midyear in Q3, you'll see better results.
Got it. Thank you.
We'll take our next question from Patrick Ho with
on the nice quarter and the year. Bertrand, maybe first, a little bit more color on the emerging opportunity in China. You saw really strong growth in 2017. And it sounds like you're expecting that growth to continue. Can you give a little bit of color in terms of where you're seeing the most activity you mentioned a little bit leading edge as well as mainstream.
Is there one of those two segments that's seeing higher growth at least in the near term?
Hi, Patrick. So there are really 3 big drivers for, or behind the record year that, we saw in China. So the first two are the ones that you mentioned. So activity in advanced fabs, primary advanced memory fabs and then strong levels of activity in some of the what I would say mainstream, logic fabs. But the third one, which was probably the biggest driver for our business in 2017 was all of the opportunities that we uncovered around the new fabs that were built in China, that was 2017.
That was also true obviously in 2016 as well. And we expect that trend to continue into 2018. So again, China is a very important, region for us. We've made some very significant investments. We talked about the 2 partnerships that we entered into in 2017.
We are in the process of completing a number of customer qualifications. I would expect most of those qualifications to be completed in the course of early Q1 late Q1, early Q2. And that will open up a lot of new capacity in China that would also allow us to shorten our lead times and all of that will put us in a great position to continue to grow in China. So again, great performance in China, where we grew 26% in 6 17. We've been growing in China at about 17% for the last 4 years, and we continue to have high growth expectations in 2018.
Great. That's helpful. And maybe as my follow-up question for Greg in terms of the OpEx management, which actually has been really good given how strong your revenues have ramped over the past year. Can you give us a little bit of color of some of the levers that you're, I guess, managing at this point, particularly as revenues continue to ramp you do need investments in some of these regions like China. How do you manage and drive some of the operating margin targets that you're now starting to hit?
Yes. So I'll take that really in two pieces. On the SG and A side, I mean, it's just, it's a, it's a laser focus on trying to, you know, become more efficient consistently in areas like finance, IT, HR, but the, you know, legal, the primary, what I'll call kind of corporate functions. I mean, if you were to look at our SG and A year over year, it would have, if you stripped out the increases related to higher variable compensation, I mean, we'd have been pretty pretty nearly flat on the SG and A side. On the E R and D side, from a dollar perspective, we were essentially flat year over year.
I would say we probably would have liked to have spent a little bit more on E R and D. In other words, we'd like to hire technical people a little bit faster. But I mean, there it's a matter of the dollar amount we're spending today deal is pretty good, in part because we're just getting better and better at how we invest our ER and D dollars and the choices we make around ER and D investments.
Great. Thank you very much.
Our next question comes from Edwin Mock with Needham And Company.
Great. Thanks for taking my question. So, I guess I have a follow-up question with Patrick's question on the cost side. You guys talked about AMH, obviously, making progress and sounds like by 3.2. We should start to see some of the benefits.
Is there any other steps that you guys are planning for any kind improvement across the model, across the different businesses?
At this point, we don't have anything specific in that regard, Edwin. Mean, we're constantly, like I said, watching costs. We use 0 based budgeting and a lot of our analysis or sort of what are we spending in different functional areas. And so to me, it's just a consistent discipline, but we don't have a specific initiative like AMH where we realigned that business a couple of quarters ago.
So I would only add to that. I mean, indeed, this is just part of being in this industry, right? We need to obviously be very focused on providing unique technology to our customers at an affordable car. So constantly looking for ways to optimize our cost structure in our manufacturing sites but also getting the right leverage of our SG and A line is something that is part of our culture. So we were very pleased in that context to meet and exceed our objective in 2017 of growing our bottom line at twice the rate of the top line growth.
And if you look at 2018, I would expect to be again in a position to grow, our bottom line faster than the top line growth. It's not going to be the same. Our relation is what we generated in 2017. But again, I would expect to generate, some really exciting flow through. In 2018.
Okay, that's helpful. On the SCEM business, I think trying to talk about some new product that you are ramping. Is that which that quantifies that mostly, success into this 3 NAND that you highlight or is it coming from, kind of different areas? You can give some color in terms of some or examples of new product that are successful in some of these end markets would be helpful.
So Edwin, so you're right. A lot of our in 2017 was really driven by the success of a number of new products. That will be again the case in 2018. So There are 2 big trends that we benefited in 2017 and that we expect to continue to benefit in 2018. The first one is, as you mentioned, relates to 3 d NAND and that's really the material intensity that we've been describing multiple times.
And as you know, in advanced memory fabs, new materials with better electrical properties will be critical for those customers to increase their bid density. So we have invested a lot in R&D and we have established a very exciting pipeline of opportunities, with new capacitors, new metals interlayer dielectric, gate dielectric. So a number of new products that, we've launched to the market last year and we will continue to launch, in 2018. But that's one of the 2 trends. The other trend that we've commented about, is the need for greater purity in process chemistries.
And this trend, as you remember, really started in advanced logic fabs probably about 10 years ago. These requirements have since been adopted by all of the advanced memory makers, and currently in both memory and logic, those, semiconductor manufacturers are pushing the requirement for greater purity up their supply chains and they are demanding greater cleanliness from their biochemical suppliers. So that's the trend that we are living right now. And I would actually speculate that we will see the emergence of a similar trend in the training edge fabs. And the reason for that is that a lot of their products are being used in emerging automotive and industrial applications where reliance will be very, very important.
So I would expect that contamination control solutions will be used not only to optimize yields, but increasingly to improve the long term reliability of the chips. And we are starting to see a number of those customers. And again, here, I'm talking about legacy fabs that are becoming more concerned about the latent reliability defects in their products. So that could actually be a very exciting breakthrough for filtration and contamination control solutions at large.
Great. That's really good color. Thank you. Last question I have just on the career facility, in terms of adding capacity and career facility, right? Where do you stand on that right now?
Is that largely completed or at least 2.36 to expect some more?
Well, it's I think that your question really relates to a statement that we made about a couple of years ago when we're describing the courier facility as being significantly underutilized. And back then, you know, 2 years ago, it's true that the facility was probably only utilized up to 10% to 20%. We are in the process of transferring a lot of, manufacturing activity, a lot of the new deposition materials, a lot of the new coating solutions will be made in, in Johan, in Korea. One element of the AMH restructuring plan is also consisting of in sourcing, some manufacturing that we use to outsource actually in Korea. So that's going to also contribute to filling up this facility So today, I would probably estimate that we are running at about 60% capacity.
And here, I'm really talking about floor. Capacity utilization. So again, you can look at that as an area of opportunity as we continue to fill up the site that, that could actually be, again, having some benefits to our overall gross margin down the road.
Great. That's it. I'm asking all. Thank you.
We'll go next to Sidney Ho with Deutsche Bank.
Well, thanks for taking my question. If you look back a year ago when consensus was expecting you to grow 5% to 6% in 2017. What are the 2 to 3 factors that drove the up side and to get to your forecast of 8% to 10% growth in 2018, which of these factors do you expect to repeat this year and what are some of the new drivers?
So, Sydney, if you look back at the year in 2017, We started the year with some more modest projections in terms of wafer starts and in terms of industry CapEx. And that's really the primary driver for the big difference between what we originally guided to and what we ended up delivering for the year. I mean throughout the year in 2017, our new products performed really well. So that was really not a surprise. But the industry was really the one part of, of the, I mean, that drove the the outperformance in 2017.
So when I think about 2018, I would say that We are pretty bullish, on memory and we expect vertical NAND, bid density to increase between 40% to 50%. And we know that this will have a positive impact on our business with significant opportunities around Deposition Materials, but also emerging opportunities with our food platform and, and contamination control solutions. I am very bullish on IoT trends as well. And, that will benefit all 3 divisions of Integris And, we are very excited about the news from some of our customers talking about adding capacity to their existing 300 millimeter fabs around the 45 nanometer node And in some cases, we are hearing talk about potentially upgrading all the fabs to tighter notes. And that would also benefit our business.
Now I'm more cautiously optimistic on CapEx. And we have some degree of visibility for the next couple of quarters, but I wouldn't say that we have a lot of visibility beyond that. And I'm also cautiously optimistic on advanced logic and foundry. So that's really the way I would characterize the guidance that we provided for 2018. Now we are obviously constantly gathering new information, and updating our forecast, and we will continue to share with you evolving views around the industry and how it will impact Entegris as we report our future earnings.
Great. Thanks.
But for
now, I would say
that 8% to 10% is a good place to start the year.
Helpful. Just to follow-up on that, you have a pretty sizable business that is not tied to Leading Edge process note. Can you remind us how big that business is and what kind of growth rate do you expect that business to grow this year? Any color would be helpful.
Yeah, we don't really disclose these numbers. So won't be able to do that very precisely today. But, I would say that about 20% to 30% of our, fab business is trading edge. And, and I would expect that business to actually grow at a faster pace than the industry MSI.
And the other thing I would say, Suneet, and that's part of you said what you think about what drove the growth last year, it's really what's helped a lot is sort of the I'll call it some of the legacy products. I mean, and the growth rates that we've seen in them, I mean, if you think about 200 millimeter and below wafer shippers. I mean, those had double digit growth last year, which you would have not, I mean, if you'd ask me 3 years ago, do you think that business is ever going to grow? I would have said no, but with everything going on in the legacy nodes, it it happened and that provides a lot of stability for the base.
Got it. That's great. Maybe one last question for me. It looks like on the M and A side, it looks like you continue to look for smaller tuck in acquisitions based on just based on last two transaction. What is your appetite for larger deals like the ones you did with a few years ago?
Maybe you can walk us through your M and A, how you think about M and A strategy?
So, Sunil, as I indicated in my prepared comments, the two transactions that we announced over the last 12 months are kind of indicative of the type of transactions you should expect us to do going forward, at least for the for the near term. Remember that what we're trying to do is to find high quality businesses at affordable prices. And, and I would say that we are more likely to find this type of combination in, in pursuing small to midsize transactions.
Okay. Thank you very much.
We'll go next to Weston Twigg with KeyBanc Hi,
thanks for taking my question. Actually I have a few, if you don't mind. The first one was just related to the growth rate in Korea was 49% in 2017 seems like a huge number, much faster growth than say wafer output and likely faster than CapEx. So just wanted to comment on What was the main driver? Was it share gains or something else?
And does that continue again in 2018?
So Wes, yes, we grew 49% in in Korea. That was one of the highlights of the year. As you recall, we made a number of very significant investments in Korea. We talked about Janhan and the local manufacturing capability that we have there, but we also expanded our technical center in Korea and these investments were actually very timely and they paid off As I mentioned, a lot of our advanced memory customers, have been in the process of evaluating new deposition materials. They're also realizing that they need more advanced contamination control solutions.
So again, the timing of those investments were perfect. They were a great playgrounds for us to collaborate with, with our Korean customers. And as a result, we have uncovered many, many opportunities across our portfolio. So The examples of that would be, our Advanced Food Products, Advanced Fluidix Solutions, both of which are really becoming the industry standards for advanced fabs, and those opportunities extended to our gas and liquid filtration and deposition materials. So So that's the recipe for the success in 2017.
And to your question, yes, we expect on the same and thin drivers to have a favorable impact in 2018 as well.
Okay, that's helpful color. Couple of other questions. 1, just on the EPS guidance versus revenue, you're guiding EPS kind of flattish on higher revenue. Just wondering what's changing? Is it mix or some other factor that would deliver that kind of guidance?
It's I mean, at the midpoint, it's flat with your point with Q4 on essentially midpoint of guidance $10,000,000 higher in revenue. It's primarily, I mean, we have slightly higher OpEx in the quarter, a couple of $1,000,000 higher was our guidance and that reflects Q1 is typically a higher quarter in terms of compensation costs.
Okay. So that would come down. The OpEx would come down there?
Depending on the overall business performance, but you usually have a pretty meaningful benefits hitting Q1 as well as we'll have higher E R and D in Q1 slightly higher. And just
on the tax
rate will be a little bit higher in Q1. We talked about a 21% tax rate for next year in Q4. The tax from the non GAAP rate was team.
Ah, good point. Okay. And then just finally, just wondering about wafer constraints. So silicon wafer production is still somewhat constrained relative to the demand. There's not a lot of new capacity coming online in at least in early 2018.
So I'm wondering if actually silicon wafer constraints would impact your ability to grow related to MSI expansion?
So based on our current estimates, we do not believe it would be the case. And again, that's a risk that we kind of factored into our guidance.
Okay. Very helpful. Thanks.
We'll go next to Chris Kapsch with Loop Capital Markets.
Yeah, good morning. I had a follow-up on the guidance for first quarter and the implied above seasonal trends. I think you said MSI for the industry expected to be down. Get that And then obviously leading, there's a couple of bellwether logic and foundry. Producers that are talking about acute seasonality in the first quarter So as you mentioned, healthy CapEx first half of this year and obviously that flows through the first quarter, but it sounds like what is really implied is continued benefit from a really strong memory end market.
My question is, is the benefit that you're seeing? Is it skewed more towards just the transition from 2 d to 3 d? Or are you getting sort of an amplified benefit as these folks that are the customers that are already producing a 3 d transition from 32 to 64 to 96 eventually 128. Are you getting an amplified benefit from material consumption that is influencing the above seasonal guide for the first quarter?
So we will benefit from both of those trends. But again, if you think about it from a product standpoint, which is really the story line behind our guidance for Q1. We expect growth to come from 3 major product areas. The first would be new product introductions in illiquid filtration and SCEM. And we've talked about that at length in the past.
The other factor going into Q1 is we I expect to enjoy the benefits from the new capacity that we added in specialty gases and gas filters. So a lot of that new capacity came online in December. And I would expect, as a result, that a number of new opportunities will open up for those products in Q1. And then lastly, I continue to expect very strong performance from our fluid handling business. I would expect those solutions to continue to equip the number of the advanced fabs.
And as a matter of fact, I mean, those fluidics solutions that really become, the de facto standard for the industry, as I mentioned earlier, And we expect we continue to expect a lot of activity in terms of new fab build in Korea and in China in particular.
Okay. Thank you for that additional color, Bertrand. And then just another question as a follow-up. You very interesting comments about how you see some trailing edge fabs. I don't know if it's 28 or maybe even older.
28 nanometer notes or older, but, how they're looking to implement increased purity requirements and filtration requirements. My question is on that sort of forthcoming trend, if that's an appropriate description. The is it extra filtration or tighter contamination requirements that are being adopted at the fab itself or are those legacy fabs also now imposing those increased security requirements on their suppliers as is the case, for leading edge fabs. That's what I'm curious about. Thank you.
It's a
great question, Chris. At this very moment, the opportunities are relatively limited to fab based solutions. But again, I would speculate that we will see the emergence of similar types of expectations and requirements further upstream in the supply chain. Again, this is very fairly recent development in the industry. So it's a little bit hard for us to really totally, size what the impact will be.
But right now, it's really mostly fab based.
Got it. And then for those trailing edge fabs, could you just clarify the the focus on doing adopting these, tighter requirements, is it more about yields or is it, did you, as you suggested, I think the addressing what could be latent defects in the chips that they might produce.
So in the past, a lot of the filtration and purification solutions used in those older fabs were aimed at yield optimization, but frankly, a lot of those fabs are already operating at fairly high yields. So their focus and where the opportunity really lies is really, around not trying to remove killer defects because again, they've done that for the most part, but it's really to focus on, on reliability defects that could, create or undermine the long term reliability of the chips.
That's helpful. We'll go next to Mike Harrison with Seaport Global Securities.
I was wondering, looking at the growth chart by region, you were asked about the Korea growth, which is very strong, but Taiwan stands out on the other end as being relatively weak. What was that decline driven by? Was it just market driven Or are there some share losses there? And if it is share loss, is that intentional? Or can you maybe give us some color on that?
Yes. So, 2017 was really more of a phase of, I would say, digestion in Taiwan after a record year in 2016. If you recall, in 2016, we had record sales for our food products in particular, And as you know, those sales, can be very lumpy and can distort trends. So and the other fact for you to remember is that many of the investment made by our Taiwanese customers in 2017s were made in China, and we recorded revenues attached to those opportunities in China. So that's another way to say that our performance in Taiwan in 2017 was in line with our expectation when we started the year.
All right. And just wondering if you can talk a little bit about the seasonality of the business and maybe how it's changed over the past few years, your guidance is suggesting about 3% sequential growth over a very strong Q4. I think if you look at some of the customers out there, it's a little bit more mixed with some of them maybe looking for a sequential line that would be typical of the seasonality from Q4 into Q1. So are we just seeing that you guys are expecting them materials market to grow faster than overall semiconductors, or are there other, share gains or other things at work there?
Yes. So the short answer is yes, we are expecting the materials business to grow faster than the underlying semiconductor growth. And as I mentioned, I think what you characterized is indeed, what we expect, we expect to see MSI to contract sequentially in Q1. But we expect, again, a number of our new solutions to continue to do very well in the marketplace, and that's what will allow us to do better than the seasonal trends that you're characterizing.
All right. And then last question for me is wondering if you can break out the growth that you're seeing right now in your product lines that serve CapEx driven markets versus unit driven markets. I'm kind of just wondering what you're seeing in terms of leading indicators that could give you additional confidence on the growth?
So, again, it's recorded. Majority of our revenue is is driven by, fab activities. So in other words, 75% or so of our revenue would be unit driven. Again, we expect MSI going into 2018 to grow at about 6% And that growth will be mostly 3 d NAND fabs and, training edge logic fabs. And again, we have a number of new products that we have positioned on the 3 d technology road map.
And we believe that Our consumable business will once again in 2018 perform ahead of MSI and and ahead of our competitors. On the CapEx side, I think I mentioned that we would expect CapEx, the industry CapEx to grow also at about 6%. Driven by continued activity in new fab build up in Korea and in China, in particular, And there, as I mentioned in previous comments, I would expect to continue to see great opportunities for our fluid handling solutions and our FOUP platform, which, as I mentioned, are really becoming state of the art solutions for the advanced memory and advanced log fabs.
All right. Thanks very much.
We'll take our final question from David Silver with Morningstar.
Yes, hi. Thank you. I guess I wanted to start with a big picture question on EUV lithography. So I was listening to the quarterly conference calls for 1 or 2 equipment manufacturers where they noted a pretty big pickup in shipments of EUV equipment. And I'm just wondering, my recollection is that that process is going to displace processes that, were inherently more materials intensive?
And so first off, I'm just wondering how quickly you expect to see this equipment put to work And then could you comment on how you anticipate that technology transition affecting demand for your overall portfolio? Thank you.
Yes. So overall, we expect the EUV adoption to be a net positive for Entegris. On the one hand, you're right that we will see, as you described, we'll see a reduction in the rate of growth in the number of steps used to process a wafer. But remember that we expect UV adoption to be limited to a fairly small number of critical layers. And as such, we believe that the growth in process steps will continue note after note, albeit at a smaller rate.
So that's on the one hand. On the other hand, the adoption of EUV will open a number of new opportunities for Entegris. Specifically, we expect that EUV resist will require better, filtration, better packaging solutions. And we also expect to develop new contamination control around the scanner itself and around the reticles. So those are new opportunities, new applications that we do not serve today.
So we've been very engaged with all of the industry participants for many years now. And I would only say that we are very ready to support the adoption of EUV by the industry in 2018.
Right. Thank you very much for that. Could I also ask In your CapEx projection of $100,000,000 to $110,000,000 for 2018, could you remind me what what the growth versus sustaining portions of that are? And then if you wouldn't mind, if you could highlight the newer initiatives, included in the growth portion of your 2018 CapEx? Thank you.
Sure. It's probably 70% to 80% of it is growth related and that falls really into two pieces. 1 is the number of our chemical and gas businesses, we own the fleet of containers In other words, we own the cylinders in our gas business. We own the containers in our, in our deposition that are surface modification or surface prep business. And so those are clearly sort of growth related.
As those businesses grow, we need more container capacity. The other piece is, growth related to we talk about our deposition business. We've got a major investment coming there in 2018. We've got a significant investment in our liquid filtration business in 2018. Those are a couple of, for instance, but the vast majority of that CapEx is to support growth.
Okay. Would it be okay if I squeeze one more question in, or are you over there?
Yes, just we're kind of running log here. So David, just a quick one.
No, that's fine. I'll follow-up offline. Thank you
very much. Thank you.
This concludes our question and answer session. I'd like to turn the conference back to Steve Kanter for closing remarks.
Great. Thank you. Before closing today's call, I do want to note that we will be participating in a couple of conferences, this month, the Goldman and Morgan Stanley investor conferences. And also again, to remind everyone about our Analyst Day on March 20, at our headquarters facility in Massachusetts, and you can contact me for more information and to register. Thank you again for joining the call, and have a great day.
Ladies and gentlemen, this does conclude today's conference. We thank you for your participation. You may now disconnect.